JFE to Delay Decision on $3.6 Billion Steel Plant in Vietnam

By Masumi Suga and Yasumasa Song -
Dec 6, 2012

JFE Holdings Inc. (5411), Japan’s second-
biggest steelmaker, will push back a decision on whether to
build a $3.6 billion integrated steel mill in Vietnam, its first
outside Japan, as it assesses competitive risks.

“We initially said a conclusion will be reached by the end
of this year, but we’ll need a bit more time,” Eiji Hayashida,
president of steel unit JFE Steel Corp., said in an interview
Dec. 5 at the company’s Tokyo headquarters. “Things won’t go
smoothly until we make sure that we’ll beat the competition as
many projects are being lined up to build new mills in southern
China and Vietnam.”

JFE’s plan is part of a push to be closer to customers in
markets where demand is surging for Japanese products such as
cars. The company’s challenge will be to cope with the high cost
of setting up a plant at a time when China’s slowing economy is
causing a glut, said Shinya Yamada, an analyst with Credit
Suisse Securities Japan Ltd.

“It’s no use to go ahead with the project when the
industry is struggling with excess steel supply,” said Yamada,
who has an outperform rating for JFE shares. “The risk is
high.”

JFE rose as much as 1.1 percent to 1,312 yen as of 10:33
a.m. in Tokyo, paring the stock’s decline this year to 6
percent. The key Nikkei 225 Stock Average has gained 13 percent
since Jan. 1.

Feasibility Study

JFE is studying whether to build integrated steelworks in
Vietnam with Taiwan’s E United Group (467), which secured a site in
the Dung Quat Economic Zone of the nation’s Quang Ngai Province,
the Japanese company said in March. JFE will examine the
feasibility of starting operations in 2016 with a capacity of
3.5 million metric tons a year, mainly of steel sheets, it said
in the March 27 statement. JFE will control the operation.

“The region will grow in the long term,” Hayashida said,
referring to Southeast Asia. “We’ll still need to carefully
consider the timing,” he said, adding that JFE will probably
require five years to six years to develop the project.

JFE Steel is in talks with Vietnam’s central and local
government to secure infrastructure, including port, water and
electricity supply to operate the works, Hayashida said. A
decision on whether to move to the environmental assessment
stage will be made by the end of March, he said. The company
will push to lower the mill’s costs, estimated at about 300
billion yen.

JFE Steel operates eight blast furnaces in Japan using iron
ore and coal as the key raw materials to make steel. The company
has yet to build a furnace outside Japan.

Scale Back

JFE may scale back 1 trillion yen ($12 billion) of
investments in the three years to March 2015 as earnings fall
short of initial targets, Hayashida said. The company cut its
full-year profit forecast by more than half to 35 billion yen on
Oct. 24, six months after announcing the investment plan, which
allocated a record amount to markets outside Japan where
economic growth is fueling demand for steel.

JFE won’t sell new shares or increase debt for overseas
expansion because it doesn’t want to weaken its balance sheet,
Hayashida said. Instead, the company will curtail investments
when earnings slump, he said. JFE Steel accounts for 84 percent
of sales at JFE Holdings, which also owns units producing ships,
power plants and handles trading.

Formosa Plastics, the diversified Taiwanese industrial
company, plans to open its first blast furnace at its Vietnam
mill in 2015 and add a second furnace in 2016 as the first phase
of $9.9 billion in investments, Ha Tinh Steel Chairman Lin Hsin-
I said in a Nov. 10 interview. Baoshan, China’s biggest publicly
traded steelmaker, plans to build a steel mill in Zhanjiang in
southern China’s Guangdong province.

JSW Stake

JFE Steel paid 48 billion rupees ($886 million) in 2010 for
a stake in India’s JSW Steel Ltd. (JSTL) The Japanese steelmaker is
currently the single-largest shareholder in JSW with a 16.2
percent holding, according to data compiled by Bloomberg.

Japanese steelmakers are looking for growth outside Japan,
where steel consumption has dropped about 30 percent since
peaking in 1990, according to data from the Japan Iron and Steel
Federation.